Beruflich Dokumente
Kultur Dokumente
9:00 a.m.
of the Committee a report from the Manager of the System Open Market
Mr. MacLaury said he was not sure why the Europeans were
that other major cities such as London, Rome, and Tokyo were
hand knowledge of the extent to which New York banks owned New
available, but the Europeans read the financial press very care
fully and the potential exposure of New York banks was one of the
major New York banks, but now they were also buying those of other
10/21/75
major banks around the country. The premium on major New York
the CD's of one or two major banks outside New York had fallen
the New York banks, over major European banks appeared to have
failure, had been able to quote rates that were 1/4 to 3/8 of a
Mr. Pardee said that while he was not sure about the role
the United States that New York City was a separable case. Such a
credits elsewhere in the economy. The fact that the City's finan
than otherwise.
reacted to the earlier SEC probings into problem areas that affected
had not received the press coverage given to New York's problems.
abroad about the New York situation had had much to do with the
concern about New York City, but he thought the decline in domestic
interest rates alone did not account for all of the recent adjust
ment in the dollar. His contacts abroad, even the central bankers
versations now inquired first about the New York City situation.
the problems of New York City were not unrelated in the minds of
drawings on the Swiss and Belgian swap lines that had been outstand
ing since 1971. All of the drawings in Swiss francs and the bulk
during the next few weeks. With respect to Swiss francs, the
that were still unresolved. Upon his return he had provided the
ther market purchases and in any event the System was waiting for
create the need for a quick resolution of all the issues that were
Treasury.
resolved once and for all. He was not ready to make such a recom
mendation today.
the Committee.
ments and the staff's base projection, and then he (Mr. Partee)
and other members of the staff viewed the outlook with more
that the large banks were being very cautious. It was difficult
was scheduled to expire on November 15, and over the next few
toward taking risk. The System had encouraged the banks to pursue
recalled that the low interest rates of the time applied mainly
by small businesses.
public market for securities recently had been strong and active,
prices.
flow of funds through the banks and the nonbank thrift insti
recently had been accounted for by the savings and loan associ
loans. It was not clear whether that was because of yield rela
from this year. The comparable increase for the business fixed
increase somewhat through the early part of next year and then
1972, 1973, and early 1974, and they were not even certain yet
at least not on the West Coast. They had not been burned,
small businesses.
were the larger banks--and the rest of the banks indicated that
the loan experience of the latter group was not so weak. How
ever, the major banks accounted for a large share of total busi
ness loans.
lesser-rated companies.
between Baa and Aaa bonds had fluctuated between 140 and 150
basis points during the summer and was at the upper end of
that range in most recent weeks. The premium had been about
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was not so wide. The picture was also similar for a comparison
last summer.
Mr. Kimbrel.
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capital.
felt that the national statistics were not consistent with the
evidence from their own operations and from those of their cus
this month's red book 1 / suggested that the phenomenon was much
the System in 1973 and 1974. The major banks had become quite
loan demand was weak. He was uncertain whether that was true
that the recovery was inadequate and also that it was negligible
real GNP, the pace of recovery this time had been above average.
the expansion in retail sales had slowed down, after having been
Mr. Morris had referred to--had moved unevenly over the years.
from growing concern about the repercussions of the New York City
factor. Concern about the New York crisis had become nation
wide; there was a vague feeling that the difficulties would spread,
and the channels for transmitting the adverse influence across the
abroad. The consequence was that they had many dubious loans and
was the worst since the 1930's; their problems in that area were
Many banks held securities issued by New York City, and bankers
standing.
him, and he agreed with the points that had just been made by
the Chairman. In his view, the oil price situation was not an
important factor in the outlook, but the New York City problem
ment, he noted that he and others would have argued earlier that the
that the staff projection of economic growth in 1976 was too weak.
He did expect growth to moderate from the pace of the second half
but rather the state of the markets for housing and autos. The
activity in the second half of this year, but given the outlook
for sales of autos in 1976 and the prospects for housing starts-
recovery soon would lose its momentum. Those prospects for next
The savings and loan associations were worried about their flows
about for next year would shut off the inflows of funds to those
be in serious trouble.
being paid on securities of both the City and the State were
shock effect. One problem at the moment was that no good bank
ruptcy law existed to handle the New York City situation. The
outstanding and did not know who all the holders were, some new
of Mr. Holland, that banks and other lenders were not likely to
relation to nominal GNP was larger this year than at any time
cerned about the outlook for business fixed investment and for
cases where their companies did not have a prime rating, they
even though they might see an expanding market for their pro
asked Chairman Burns whether his view that the City was not
Chairman Burns replied that he would not say the City was
a month or two before the City ran into trouble once again.
10/21/75 -39-
New York City had assumed enormous interest charges, and the
debt that had to be rolled over, it was not at all clear that
the City would be able to bear the burden of the high interest
rates. For that reason, he believed the chances were high that
a few years and the interest rates would have to be scaled down
the City could bear, and would only postpone the necessary
reorganization.
Mr. Winn said he had felt that bankruptcy was the only
way out for New York City, but the experience of the Penn
solution.
case, the shareholders had lost their investment, and then wages
10/21/75 -40-
programs. The part of the budget that was under the control of
the case of New York City, compared with Penn Central, at least
on wages, which were already too high. But still, the financial
a tax increase made no sense in New York. The City had experienced
Mr. Coldwell remarked that New York did not get very much
sympathy.
10/21/75 -42
not pass in Congress if the vote were taken today, the number
voting for assistance would be larger than a month ago and very
situation and outlook, that the Chairman had made most of the
of the chances that this time the automobile market might prove
not think the probabilities were high that sales would exceed
the staff projection. However, there was some chance that expan
tions for the period September 16 through October 15, 1975, and
the Committee.
8 per cent and it slackened off when it appeared that the yield
from maturing CD's held by some small investors had moved into
Treasury bills, and also that part of the proceeds from maturing
staff did.
rate of about 4 per cent. For November alone, the former pro
jected a rate of 7 per cent and the latter a rate of 10 per cent.
quite similar. Thus, the error had averaged 3.3 percentage points
for the Board's staff and 3.5 points for the Bank's staff. The
the ranges adopted by the Committee had been 3.2 percentage points,
10/21/75 -48-
respects.
for the period from March 1975 to March 1976 which he had
10/21/75 -50-
was 6.8 per cent, well within the target range of 5 to 7-1/2
per cent. For M 2 the growth rate was 10.0 per cent, near the
upper end of the 8-1/2 to 10-1/2 per cent range. For M3 the
and M2 had grown at rates of 5.8 and 9.1 per cent--both well
deciding on target ranges for the period from the third quarter
One might also note that the new target period would end about
for M1.
10/21/75 -52-
had been under way for only 4 or 5 months, this might well
in the process.
the third quarter of 1975, at 6.9 per cent, was above the mid
higher figures for the third quarter of 1976 than would the
implicit increase in the target when the base for the one-year
range had been shifted forward from March 1975 to the second
were small both in absolute terms and relative to the usual range
change should be made in the range for M1. In that event, the
pressure late this year and early next year." But a reduction in
10/21/75 -54-
for discussion and comment and would suddenly achieve some promi
at this time.
means of dealing with the ranges for M 2 and M3 that seemed reason
able to him. One was to retain the present ranges, despite the
Another was to retain the present ranges, but to inform the Congress
was chairman, be asked to review the question and give the Com
the Committee retain the present range for the longer-run growth
the bank credit proxy, which was among the aggregates for which the
best not to mention growth ranges for the bank credit proxy in his
Mr. Mayo said he had struggled a good deal with the ques
per cent range for M ; on the other hand, he was concerned about
the staff's conclusion that that would call for reducing the
and because of his concern about M 2 and M3, he had given some
for M1.
for M1. One consideration affecting his thinking was that the
lower, as well as the upper, limits of the ranges for M 2 and M3,
for some of the same reasons that had led the Chairman to recom
mend retaining the upper limits of those ranges and both limits
rates. He, for one, was hopeful that the present ranges for the
in the lower limits for M2 and M3 because of his feeling that the
10/21/75 -58-
be ignored entirely. But the choice had been a close one, and he
was among those who thought that more attention should be paid to
and analyses, not to the manner in which the targets were expressed
growth rates and figures for the base period. As he had remarked
had been a wise one. To begin now to use levels rather than growth
tion was entirely consistent with his own thinking. His recommen
not disturb him, and they would have the advantage of helping the
widen the range for M 1 by reducing the lower limit. But in light
of the economy.
pletely with that view that he had made his initial comment about
not taking the numerical targets too seriously. To carry the point
one step further, he would not feel bound by the longer-run ranges
10/21/75 -61-
the difference in his attitudes toward the upper and lower limits
gested that those ranges were no longer consistent with that for
M
1.
Mr. Eastburn observed that he would take exception to
Mr. Volcker's view that the longer-run target ranges should not
shared the view that that would not be appropriate at this time-
levels during the past several months. He would suggest that the
to achieve growth rates at the upper ends of the ranges over the
than the Committee was now using, and he thought it was desirable,
indication that the Committee was aiming at growth rates near the
ing at growth rates near the upper ends of the one-year ranges
ever, the rates of growth over the past 6 months were well within
the ranges; indeed, they were near the upper ends for some aggre
flood of new money created in May and June had not been extinguished,
and that it had been doing its work in subsequent months when the
he would not want the public to lose sight of that fact. The task
because he did not like the idea of widening the ranges still
note in his testimony that the actual growth rates might very
use levels for internal purposes over the coming quarter and then
context.
work already done by the staff. If that did not meet the needs
tives were not targets in the meaningful sense that one could ask
10/21/75 -65-
later whether or not they had been achieved. That the figures
reiterated often, and he was pleased that the Chairman did so.
tinction had been drawn today between the manner in which the
targets were presented to the public and the way in which the
misleading itself.
7-1/2 per cent. Earlier in the year, for example, he had expressed
range--7 or 7-1/2 per cent; now, given his view that the outlook
If the range was so wide that it could be retained even though the
it would consider the level rather than the growth rate to have
on those who wanted to retain the earlier growth rate rather than
the earlier level whenever one no longer implied the other. Simi
order at some time in the future and there would be some advantage
though the need for them might still be rather distant. Mr. Volcker
had already covered most of the other points he had planned to make.
the upper and the lower limits for M 2 and M3 and stressing the
by Congress itself.
ing the proxy among the targets if little or no attention was paid
Mr. Mitchell remarked that the credit proxy was the aggre
tions; unless the financial system was given the chance to con
and thus slow growth in M2 and M3. From time to time Committee
the members to allow for the possibility that money demands would
the lower but not the upper limits of the ranges for M2 and M3 was
now, however, because those variables had been given special stimulus
important that the Committee stand ready to adjust the ranges when
ever the need arose, if only to avoid suggesting that its approach
bank credit proxy among the aggregates for which the Committee
time to explain at this point. Earlier the range had been 6-1/2
to 10 per cent, and Mr. Mitchell suggested 5-3/4 to 6-3/4 per cent.
recognize that, given the imperfect state of the art, it might have
endorse the ranges suggested by the Chairman for the reasons the
preference for levels over growth rates. He did not feel strongly
good deal of merit, the real test was whether they would permit
the Congress and the public generally regarding the lag with
not sure whether a lower limit of 5 per cent for the M1 range
greater use of both levels and point targets in its internal delib
opposite was happening; the money supply was growing slowly and
ever, he had not changed his general view that the recovery was
was somewhat above the 6-1/4 per cent midpoint of the present
10/21/75 -73-
the range for M1 to 6 to 8-1/2 per cent. He would also accept the
in the blue book, along with 6 to 8-1/2 per cent for M1 under
impression that the bank credit proxy added little to the Com
to eliminate that aggregate from the list for which the Committee
from the second to the third quarter had been above the midpoint
was inclined toward point targets and dollar levels, on the grounds
agree with those who seemed to favor change for its own sake, or
with those who argued that the logic of the situation required
time.
change the targets for the former and not the latter would imply
widen the ranges for M 2 and M3. Once the rate of growth in M1, was
staff would have advised the Committee that a 2 per cent growth
over, the spread between growth rates in M1 and M 2 had been much
wider than the staff would have forecast. In view of the problems
Committee's discussion today might well ask whether the subject was
ically, that real GNP would grow by 7 or 8 per cent over a 12-month
tended to rise faster than the money supply in the first year of
GNP would actually grow at a 7 or 8 per cent rate, but the proposed
Mr. Winn asked whether the Chairman would have used similar
that he agreed with the Chairman's suggestions for targets for the
rates for the aggregates at some point in the future, since growth
there was great uncertainty about them; and retaining the upper
for this meeting. If the members agreed with that procedure, the
financial relationships:
10/21/75 -79-
for both CD's and Treasury bills, and he did not believe such
on CD's of the major New York banks had been subject to upward
what more from the System than they would have otherwise.
buy bills; given the existing CD rates, bills were not a good
buy.
had issued CD's and used the proceeds to reduce its borrowings
of Federal funds.
per cent for M2, and 0 to 4 per cent for RPD's; and for the
a 5-1/4 per cent lower limit for the funds rate in the expecta
the Chairman's proposal for the funds rate range, first because
for several months the probability was high that the projection
quate growth in the money supply soon. While he found the slow third
buoyant in the past 4 weeks, and that current capital market con
ditions were more typical of the final stage of a boom period than
per cent range for the funds rate. Those specifications would
require the Manager to seek a 5-1/2 per cent funds rate immediately
and would provide additional leeway for further moves should that
prove necessary.
in the blue book that the short-run and longer-run objectives were
interval.
of 3 to 7 per cent for M1 and 5-1/4 to 6-1/4 per cent for the
had proposed, rather than at 5-1/2 per cent, as called for under
alternative A.
and he favored a 5-1/4 to 6-1/4 per cent range for the funds rate.
which allowed the Federal funds rate to, in effect, seek its own
per cent Federal funds rate, and he would recommend that the Manager
10/21/75 -87-
quite small.
cerned about an upper bound of 7 per cent than about a lower limit
3-1/2 per cent. While he did not share Mr. Morris' view of the
the latter's concern about the growth of the money supply over the
basis, and he did not view that as too strong. Moreover, he con
for M1 over the one-year period through the third quarter of 1976,
10/21/75 -88-
posals for the ranges for M1, M2 , and RPD's. For the Federal funds
if the upper bound was set above 6 per cent, he would reduce the
he had suggested. He would not want to set the lower limit of the
mended a lower limit of 5-1/4 or 5-1/2 per cent, with some prefer
necessary somewhat later to reverse course and raise the funds rate.
per cent rate within the next week. Indeed, a rather prompt move
toward the 5-1/2 per cent area would seem quite reasonable in
The Desk would then still have some leeway to reduce the funds
Mr. Mayo asked how Mr. Sternlight thought the market would
was in the 5-1/2 to 5-3/4 per cent area--even though the Desk had
not yet aimed for a rate below 5-3/4 per cent. Accordingly, he
thought that operations along the lines the Chairman had suggested
aggregates to changes in the funds rate was quite small and the
urge the Committee not to be too quick to change the funds rate for
supply.
the New York City situation might call for some easing of policy.
for policy applied better to the period just past than to the
one ahead. While he agreed that the funds rate was an imperfect
effect, there had been a reduction in the level of the funds rate
manageable so long as the rate did not reach new high ground.
allowing the funds rate to move above 6-1/4 per cent, even if
reduction in the rate within the next week, and he would urge a
very real danger of continuing inflation and the need for caution
increase in OPEC oil and of the rise in the private GNP fixed
if necessary.
the dollar. But among its advantages was the fact that it would
help the rest of the world--which, in turn, would help the United
ance premiums.
his judgment that the demand for money and credit would strengthen
directors had been nearly unanimous in the hope that the Federal
Reserve would keep that danger in mind now that recovery was
per cent.
tion in the funds rate to about 5-1/2 per cent, with the intent
could not be certain about the appropriate lower limit for the
in the Committee members' views, they did not seem large. For
mally whether they would find that range acceptable, on the under
standing that the Desk would seek a 5-1/2 per cent funds rate
within the next week unless new data on the aggregates available
acceptable.
7 per cent for M1, 5-1/2 to 8-1/2 per cent for M2 , and 0 to 4 per
cent for RPD's for the October-November period; and the language
per cent for M2, and 0 to 4 per cent for RPD's. The range of
tolerance for the weekly average Federal funds rate in the inter
meeting period would be 5-1/4 to 6-1/4 per cent, with the under
Secretary
ATTACHMENT A
Henry C. Wallich
October 21, 1975
plans for financing a small part of the German budget deficit abroad,
while the British representative expressed doubt about the need for
which had left the working out of certain matters to the central banks,
its next meeting in January. There was, in his opinion, two views.
other view was that central bank dealing in gold would become possible
only after amendment of the IMF agreement, which might take 18 months or
more. 1/
1/ Two sentences have been deleted at this point for one of the reasons
cited in the preface. The deleted material described the degree of
support from certain countries for one of the views cited above.
except the U.S. and the IMF representative. The German, French,
would not be legal prior to amendment, but suggested that the BIS could
act for the central banks by buying gold and reselling it to them later,
gold dealings until after amendment but recognized that the alternative
view might have some merit, and I suggested further discussion of the
banks bought the gold sold by the IMF for the benefit of developing
countries, the IMF would be virtually unable to sell any gold at all.
Even a few tons, in the present state of the market, would cause the
price to collapse.
out, would amount to only 10 per cent of annual South African sales.
the U.S. position, and even the IMF representative's support was
perhaps any central banks would buy. But there is a belief that
BIS meeting.
ATTACHMENT B
Alternative
Economic
Projections
October 20, 1975
MONETARY
Indexed by M1 growth:
FISCAL
ADDED FISCAL
Annual rate of
Blue Book 1975 1976 Increase over
Alternati ves III IV I II III six quarters:
1975II--1976IV
NOMINAL GNP
REAL GNP
PRICE INDEX 1/
NOTE:
Fiscal Increment - Additional effect of Administration's proposed
fiscal package.
Attachment C
GENERAL PARAGRAPHS
Alternative A
Alternative B
Alternative C
M2 7-1/2 to 10-1/2%
9 to 12%
M3
Proxy 6 to 9%
1/
5-1/2 to 8-1/2%